SDLT – Group relief Q&A
Property Tax, Stamp Duty Land Tax
The client is non-resident (he lives in Ireland). He owns 100% of a UK company (‘UK Co.’) which in turn owns various UK properties which are all mortgaged. The client has been advised by his Irish lawyer to exchange his shares in UK Co. for shares in a new Luxembourg company (‘Lux Co.’). As they have similar share exchange rules in Ireland to those in the UK, there should therefore be no Irish tax on the share swap.
Q: Would SDLT be payable if UK Co. then transfers the properties to its new Lux Co. parent. If I understand it correctly, normally the assumption of the debt (by Lux Co.) would be treated as consideration for SDLT purposes, even if no actual cash passes from Lux Co. to UK Co. So that means we need to see if group relief applies, as per Finance Act 2003, Schedule 7.
A: Correct – also there is a deemed market value rule in section 53 FA 2003 for transfers between connected companies.
Q: Schedule 7 FA 2003 provides that there is no SDLT on transfers between members of the same group. I believe Lux Co. and UK Co. will be part of the same group, given that Lux Co. will own 100% of UK Co. and Lux Co. will in turn be owned 100% by the Irish client who previously owned 100% of UK Co. Is that right, even when the parent is incorporated outside the UK?
A: Correct – provided that UK Co. is the ‘75% subsidiary’ of Lux Co. group relief will be available. Both Lux Co. and UK Co. have to be bodies corporate but non-UK bodies corporate count for this purpose.
In order for UK Co. to be the 75% subsidiary of Lux Co. UK Co. must be the beneficial owner of not less that 75% of the ‘ordinary share capital’, the profits available for distribution and the assets available for distribution on a winding up of UK Co. Ordinary share capital means all the issued share capital other than share capital which gives the holders the right to a fixed rate dividend and no other rights to share in profits. So if Lux Co. is the only shareholder and there is nothing ‘unusual’ about the shares, group relief should be available.
Q: I see there are anti-avoidance provisions that affect de-grouping and a general anti-avoidance provision that the transaction must be for bona fide commercial reasons and not with a tax avoidance motive. Would I be right in thinking that only a UK tax avoidance motive counts here? So if there’s an Irish tax avoidance motive, that’s ignored for the general anti-avoidance test.
A: Paragraph 2(4A) FA 2003 provides that group relief is not available for a land transaction if the transaction is either not carried out for bona fide commercial reasons or forms part of arrangements the main purpose or one of the main purposes is the avoidance of SDLT, stamp duty, income tax, corporation tax or CGT so avoidance motives relating to non-UK taxes do not count. In any event IHT is not in the list.
Q: I have looked briefly at the ‘whitelist’ in the SDLT Manual of transactions which are not likely to be challenged. I see there is a reference to the possibility of a change of control more than three years after the property transfer. What the client has in mind is sharing ownership of the Lux Co. with his children, for Irish gift/inheritance tax reasons. We were thinking of splitting the Lux Co. shares so the A shares carry control but less financial interest and the B shares carry no votes but have a financial interest in the company. The client would initially own both A and B shares, but would then give the B shares to his children. Would that affect the group relief for SDLT? Would he have to wait more than 3 years before making any gift of the B shares?
A: It is the Lux Co./UK Co. link that must be maintained. Changes in ownership of Lux Co. are irrelevant provided that UK Co. remains its 75% subsidiary and the properties stay where they are.
Group relief is claimed on the SDLT return (SDLT1) by checking Box 9 and entering relief code 12.
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At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.